Financial Innovation Wasn’t Buried with Lehman Brothers

After Lehman we tend to forget the everyday advantages of the global finance system and its related technological advancements, since we are understandably preoccupied with the rapid destruction of wealth which we have witnessed over the past few months. We might do well to keep in mind the example of Japan, the first country to be hit by deflation due to the consequences of a major crisis in financial markets in the early 1990s. In spite of it all, the Japanese have not given up on their passion for technological innovation applied to financial transactions. Japan is number one in the use of electronic payment systems based on smart cards. Almost 100 million smart cards are in circulation in the archipelago, having financed transactions for a total of $8 billion in 2007. A smart card is the same size of a credit card and contains a microprocessor that handles and memorizes sensitive personal data. The microprocessor is linked to a computer that receives and processes information. The same SIM technology is at the heart of your cell phone. But it can also be applied to passports, ID cards, and electronic plane or train tickets. Tokyo commuters have benefited from electronic money: they no longer have to swipe their cards at the turnstile when entering the subway. All you need is a pre-paid smart card, which also spares you the hassle of calculating the fare. You can also pick up a newspaper at the kiosk without breaking your stride toward the subway car, as well as buy something to eat at the convenience store near your apartment. Here some problems can arise. There are presently six circuits of smart cards, and they are mutually incompatible. Your convenience store might not accept the card you have used to pay for your subway ride. Often smart cards are issued as a way of securing customer loyalty. As it often happens in markets where new products are being exchanged and network economies (price of service decreases as customer density increases) are significant, competition will be fierce before a common standard prevails. In the meantime, as we wait for the winner, and thus the emerging standard, in smart card wars, BitWallet, the company controlling 40% of the market, states it is not making profits. And industry analysts say also competitors are not making any money. Although having many cards in circulation can be confusing and cumbersome, the competition among various issuers to get their attention is benefiting Japanese consumers. Soon there will be a consolidation of the smart card industry, similarly to what has already occurred in the credit card industry. In high-tech industries, including finance and electronic money, competition yields benefits but only via periodic outbursts of economic war which inevitably provoke higher instability than in the past.